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FINANCIAL STATEMENT ANALYSIS
·
C
OMMON
S
TOCK
amount paid to the company by investors in
exchange for a claim on the ownership of the company. Often, the
number of outstanding shares is included on this line.
·
R
ETAINED
E
ARNINGS
value of the assets of the company in
excess of the claims upon those assets (liabilities and
stockholders' ownership). This does not represent cash held in
the company.
The liability accounts are listed in the order in which they must be paid.
Accounts payable are generally due within 30 days; stockholders' equity
accounts represent ownership and never need to be paid off.
Assets Equal Liabilities Plus Equity
Source of term
"balance" sheet
Notice that the total of all assets is equal to the total of the liabilities
and equity (286.9 at the bottom of each side of the Balance Sheet in
our example). This is always true, hence the term "balance" sheet. The
value of the assets equals the amount of money borrowed by the
company plus the value of the owner's investment in the company.
The stockholders' (common) equity, also known as net worth, is the
residual between the value of the assets and the value of the liabilities.
In our example Balance Sheet:
Assets - Liabilities = Common Equity (Net Worth)
286.9
- 181.1
= 105.8
Suppose that assets decline in value; for example, some of the accounts
receivable are written off as bad debts. Liabilities remain constant; the
value of common equity is adjusted so that both sides of the Balance
Sheet remain equal. If the value of assets increases, those benefits
accrue solely to the stockholders (common equity).